Positive operating margins may be out of reach for many hospitals and health systems in 2023.
Health systems are working to reduce high contract labor costs while managing staff shortages. They are also absorbing increased costs as payer chargebacks fail to keep up. If low margins persist, some systems, especially smaller organizations, may be forced to make major operational changes.
As of October, hospital operating margins averaged -0.5%, compared with more than 4% a year earlier, according to consulting firm Kaufman Hall’s monthly snapshot. The index is based on national average data taken from more than 900 hospitals. Overall, for-profit systems are performing better than nonprofits in the current environment.
Erik Swanson, senior vice president of data and analytics at Kaufman Hall, said he expects margins to “decline significantly” as the new year moves into the new year.
“We are still going through a period of change, although not the level of volatility we have experienced in the past,” Swanson said. “I suspect that 2023 may not be the time when we reach the new normal. What I suspect is that there will be a continuation of some of the trends that we are seeing, but it will start to become clearer about that new normal.”
With operational issues still present, healthcare providers will continue to search for new ways of providing care and reassess what services should be provided – an attempt to stabilize an industry that was largely considered recession-proof in previous recessions.
Health systems scramble to hire high-priced contract workers by 2022 as staff burnout and COVID-19 exposure leave gaps in patient care. Organizations are actively working to reduce reliance on contract labor, but experts say demand for contract workers will take some time to normalize. The healthcare industry is short of 2 million nurses, credit rating agency Fitch Ratings estimated in its December outlook report.
Swanson notes that systems are competing for pay and bonuses, and also have to contend with the lure of large corporations like Amazon or Target for some full-time positions.
Tenet Healthcare Corp. The Dallas-based company began cutting some 12-week labor contracts in October, due to high demand in the summer when exposure to COVID-19 at one point caused nearly 10% of Tenet employees to lose their jobs. , CEO Saum Sutaria said in November. He estimated two-thirds of the increase in labor costs came from the California and Michigan markets due to quarantine procedures.
The Public Health System reported contract labor costs in the third quarter rose nearly 70 percent year-on-year to about $100 million. Still, that’s an improvement from $150 million in the second quarter and $190 million in the first quarter at the Franklin, Tennessee-based system.
Chief Financial Officer Kevin Hammons said he expects those costs to drop between 40% and 50% by 2023, a shift driven by reduced usage and reduced payout ratios. Last year, the system also centralized its nurse recruitment team, allowing the system to attract talent outside of the local market and better track recruitment efforts.
“We are optimistic about 2023. Overall, we expect our margins to improve,” said Hammons.
The for-profit system Community Health had an operating margin of 1.2% in the third quarter, while Tenet, also for-profit, reported an 8.4% margin, according to analysis by the Kaiser Family Foundation. .
Health systems are paying more to recruit and retain full-time staff, putting additional pressure on their bottom lines.
Oakland, California-based Kaiser Permanente, for example, avoided a strike in November with a tentative agreement to give more than 21,000 nurses and nurse practitioners in northern California a 22-year increase .5% in four years, plus the addition of more than 2,000 positions to overcome the shortage of personnel. As of the third quarter, Kaiser Permanente’s total operating expenses were up 5.2 percent year over year. It reported -0.3% operating margin in that quarter.
The ongoing transition to outpatient care will be a key driver of the hospital’s operating profit. Outpatient care may not be very profitable in some areas, Swanson said, but it can still be profitable. He hopes the systems will continue to invest in emergency surgery or urgent care centers, leaving hospitals for more serious cases.
Overall, outpatient care is less expensive for health systems, but the larger shift will put pressure on traditional hospital systems when those facilities aren’t needed as much. so.
Systems are also readjusting to work without the federal COVID-19 relief fund, which will largely go bankrupt in 2021, even as supply costs remain high and cash is depleted. exhausted in some organizations.
At the same time, health systems continue to struggle with payers for higher reimbursement.
According to a study from professional services firm Crowe, 11% of claims were denied in 2022, compared with 10.2% the year before. That 11% would represent approximately 110,000 outstanding claims for a mid-sized health system. Crowe’s research also found that disapprovals were valued at 2.5% of total revenue as of August, up from 1.5% in January 2021.
There will be more “recalls” or refund claims by insurers sent to providers in the new year, as people pay again, said Colleen Hall, principal manager. retaining suppliers who enlisted teams to crack down on overpayment claims after that process weakened earlier during the pandemic. of Crowe’s healthcare services team.
“Hospitals will have to make sure they’re getting every dollar they’re entitled to,” Hall said.
With limited funding, health systems seek to generate revenue in a variety of ways. Sacramento, California-based UC Davis Health evaluates joint venture opportunities, partnering with community hospitals as a delivery organization, and providing subspecialty services that patients cannot find elsewhere. is different. UC Davis also works with rehabilitation facilities to free up inpatient beds for more patients.
“Those things won’t be a big bang, but we’ll build a portfolio,” said CFO Cheryl Sadro.
Some healthcare organizations may have to consider structural changes if profits continue to suffer. That could include changes to care delivery, including what services it will provide and the size of the workforce. Smaller, rural hospitals tend to struggle more with cost control, and many are still experiencing declining patient numbers.
Ronald Winters, co-founder and chief executive officer of healthcare consulting firm Gibbins Advisors, which often works with smaller community hospitals, said healthcare organizations can only keep costs down. hitherto. They need balanced patient numbers and favorable payer combinations to improve their margins.
“If you don’t have flexibility in your balance sheet, you’re going to face a crisis or need to change quickly,” says Winters. “Implementing changes quickly isn’t easy because the biggest thing you can do is cut staff or cut back on services and staff, which doesn’t happen instantaneously.”
Many independent hospitals struggle to make changes, he said, motivated by a desire to remain independent, but failing to act is more likely to lead to adverse outcomes.
Ultimately, the fate of a health system largely depends on its financial position before the recession.
“Will all hospitals go bankrupt next year if they operate at a loss? Is not. Some have multiple internal buffers [their] performance that they can withstand it. Some may find themselves in those positions. It really depends on your financial strength today,” says Swanson.